You are here

How about a holiday from corporate extortion?

Submitted by CW Editor on February 16, 2011 - 12:21pm

Fortune features a Feb. 16 article by Tory Newmyer about how large multi-national tech, pharmaceutical, and energy corporations such as Oracle, Cisco, Apple, Duke Energy, and Pfizer are lobbying vociferously for a one-year so-called "tax holiday" that would allow them to bring roughly $1 trillion in profits from their overseas operations back to the United States at a 5 percent tax rate instead of the "official" rate of 35 percent.

There are so many things wrong with this proposal — and the underlying issues — that it's hard to decide where to begin. But let's start by considering the mafia-like extortion by which these corporations are refusing to bring money back to the U.S., unless they pay only a token amount of tax on it (i.e., "Do what we say or you'll never see your money again"). Or the fact that President Obama's proposed budget contains a structural deficit estimated at roughly $1.5 trillion, and taxing that overseas corporate stash at 35 percent would instantly cut that deficit by $350 billion.

But even more vexing than the arrogance that corporate impunity breeds is the fact that one of the reasons many U.S. corporations have so much money sitting overseas is due to an accounting shellgame they like to play (and which the government largely ignores), in which they ship products between and among their foreign subsidiaries, and claim them as overseas "sales", in order to take advantage of lower foreign tax rates, and to keep the profits beyond the reach of U.S. authorities.

Moreover, it's pure farce for most corporations to claim they pay anywhere near the official 35 percent tax rate, either in the U.S. or abroad: After taking advantage of tax loopholes, dodgy write-offs, and various other accounting gimmicks, the average real-world tax rates for most large companies is considerably lower than that, and many manage to pay effective rates in the single digits.

So what we're really talking about here is U.S. corporations that are making billions of dollars in profits — yet paying lower rates than many of their human counterparts (who are barely scraping by) — yet are nonetheless complaining that their rates are too high, and refusing to let the government get at their money unless it lets them have it practically tax free.

Instead of giving these corporate scofflaws a holiday, a far more fair proposal for corporate tax reform would be to simply change U.S. tax laws to discourage corporations from sheltering profits overseas in the first place, and ultimately doing away with the distinction between overseas and domestic profits altogether.

Some will respond that these companies are usually taxed by the countries in which they operate (mostly at extremely low rates), but that could easily be offset in several ways, such as setting the U.S. tax rate for overseas profits at the differential between the local tax rate and the official U.S. rate of 35 percent. Thus, if a company pays a 10 percent tax on profits in country X, the U.S. rate on profits from that country would be 25 percent (35% minus 10%).

That way, U.S. companies would always pay 35 percent on their profits no matter where they were claimed. This would have the added benefit of discouraging them from keeping profits overseas, since there would be no advantage to doing so.

And it would also effectively end the concept of overseas tax havens for U.S. corporations, since no matter how low a country reduced its corporate tax rates to attract foreign companies, the effective total rate for U.S. companies would be the same. Why base your headquarters in country X when you'll end up paying the same tax as you would if it were in New York, Chicago, or San Francisco?

Besides all that, the proposed alternative to fair taxation has been tried before, and been shown to have at least one clear disadvantage — it doesn't work. As the Fortune article itself points out:

Multi-nationals prevailed on Congress to approve a one-year tax holiday once before, as part of a jobs package in 2004. Back then, the companies argued the relief would help them boost economic growth, because they'd plow their repatriated money into research, investment, and hiring. And while plenty of outfits benefited from the break — 843 corporations made use of the holiday, bringing back a total of $362 billion — the broader economic benefits were dubious.

The Treasury Department wrote rules trying to ensure that the recovered cash was in fact invested back into the companies. But money is fungible. Although the rules expressly prohibited using the funds for dividend payments or stock buy-backs, subsequent analysis has shown participants sent most of it to shareholders anyway. One study, released by the National Bureau of Economic Research, found that for every dollar of repatriated cash, companies bumped up shareholder pay-outs between 60 and 92 cents.

"A tax holiday would bring a substantial amount of cash back to the United States, and paying that out to shareholders is good for the economy," said study co-author Kristin Forbes, an economics professor at MIT's Sloan School of Management and member of President George W. Bush's council of economic advisers. "But if you're a politician claiming this will create a lot of jobs or new investment, it isn't supported by the data."

So a tax holiday for corporations would essentially be a holiday for rich shareholders, but not do much for ordinary working Americans who, not surprisingly, aren't seeing their tax rates reduced to 5 percent.

And the Fortune article also notes that the corporate executives clamoring for ever more money for their hugely profitable companies aren't even claiming that their proposal is first and foremost about jobs. The CEOs of Cisco and Oracle "don't promise that companies would drive all of their repatriated money directly into job-creating investments", Newmyer notes. "They acknowledge that companies might pass the money along to shareholders again."

Instead, they argue, giving money to rich shareholders would boost the stock market, which would in turn increase consumer confidence (which, we are left to infer, would cause them to spend more of their own money, which few of them actually have — thanks to big banks and other corporations that crashed the economy). How's that for a 3-rail, trickle-down bank shot?

(If the government really wants to increase jobs, the two CEOs advise, they should use the $50 billion collected from the meager 5 percent tax on all this corporate wealth to fund a jobs program — which would almost invariably involve yet another corporate tax break, this time for companies that promise to hire more workers, or some sort of matching grants so that companies can hire new workers more cheaply.)

Newmyer also notes that corporate lobbyists failed in their attempt to attach a similar proposal to the 2009 economic recovery bill, an effort led by (of all people) supposedly socialist California Senator Barbara Boxer, who he says "acknowledged that companies took advantage of the first holiday [and] abused the spirit of the requirements on how the money needed to be spent", but "tried to reassure her colleagues that tighter strings in the latest proposal would prevent a repeat performance".

Despite her entreaties on behalf of billionaire corporations, the measure received only 42 votes in the Senate — and Sen. Byron Dorgan's trenchant observation that "There is no education in the second kick of a mule", which seems to be North Dakotan for "Fool me once, shame on you; fool me twice ..."